EUR/AUD: Technical picture points lower

The euro has been hit by three bearish fundamental developments over the last few trading days. First, ECB President Mario Draghi’s heavy hints of a possible interest rate cut in June took the wind out of the bulls’ sails on Thursday. Next, the single currency was hit by aweaker-than-expected German ZEW report this morning, raising concerns of a slowdown in the Eurozone’s largest and most important economy. The final body blow for the euro came this morning in the form of the following comment from German Bundesbank President Jens Weidmann:

Weidmann is a notorious hawk, so his tacit endorsement of further easing if inflation forecasts drop further increases the likelihood of action by the European Central Bank at its June meeting.

We’ve been closely following the EUR/AUD since it completed a multi-month Head-and-Shoulders topping formation in late March (see “EUR/AUD: Following GBP/AUD to a Major Top?” below for more). After consolidating below previous-support-turned-resistance at 1.5025 for the last five weeks, the recent price action suggests that the bears may be ready to drive the pair to another leg lower as we head into the latter half of May.

Looking to the daily chart, the unit appears to have finally broken conclusively below 61.8% Fibonacci support at 1.4730; with this support level breached, bearish swing traders may look to target the 78.6% Fibonacci retracement down near 1.4430 next. On a shorter-term timeframe, rates are currently showing a Bearish Engulfing Candle* in development. This bearish formation would be confirmed by a daily close below 1.4667 and would suggest that the bears have reasserted control after yesterday’s pause.

The secondary indicators are also flashing warning signs for bullish traders. The MACD has just crossed back below its signal line and is currently below the “0” level, indicating a shift back to bearish momentum. More importantly, the RSI indicator has been unable to break above the 60 level, indicating that the overall downtrend in price remains intact. As long as the MACD keeps trending lower and the RSI is depressed, traders should favor selling any short-term bounces that emerge.

As we noted above, the next logical area of support is not until down at 1.4430, the 78.6% Fibonacci retracement, followed by the head-and-shoulders measured move target down at 1.4220. Meanwhile, bulls would like to see a move back above the 200-day moving average at 1.4868 to erase the near-term bearish bias.

A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).